Process of Purchasing Management
Purchasing management is a complex process that involves a number of activities. Any fault at any point of the purchasing management process can lead to huge losses for an organisation. Thus, it is important for an organisation to systematically purchase.
Table of Content
The purchasing management process involves a number of steps, which are explained as follows:
- Recognition of Need
- Purchase Requisition
- Review of Request
- Approval of Budget
- Request for Quotation
- Negotiation With Vendors and Issuing the Contract
- Receiving Goods and Services
- Three-way Matching
- Approval of Invoice and Making the Payment
- Keeping Records
Recognition of Need
The initial phase in the procurement process is to identify the needs of a product. It could be a recurring purchase or a new product. These needs are analysed and then the request is created for the purchase.
Purchase Requisition
The requisition for the purchase starts with a request for quote (RFQ) in which the organisation asks the shortlisted suppliers and contractors to submit price quotes and bids for the supply of a specific number of standard products. Thereafter, the request for proposal (RFP) for the purchase of goods can be made in writing by e-mail or hard copy to the purchasing department.
Review of Request
The purchase request is reviewed by the purchasing and the finance department. Once it is approved, the requests become a purchase order. If the request is rejected, then it is sent back to the department with a valid reason.
Approval of Budget
Once the purchase order is prepared, it is further moved to the finance department for obtaining approval with regard to the budget.
Request for Quotation
When the budget is approved, the procurement team sends a request for bids and quotations for the best price to the suppliers and vendors. The price quoted by various vendors is compared and scrutinised. On the basis of this, vendors are shortlisted.
Negotiation With Vendors and Issuing the Contract
After the selection of the vendor and the negotiation of pricing, the contract is made. The contract is then signed and the purchase order is then sent to the vendor. Later, the vendor accepts and acknowledges it.
Receiving Goods and Services
The vendor delivers goods and services at a time which is mentioned. The purchase department monitors and examines the order, and informs the vendor regarding problems or issues with the items received.
Three-way Matching
In three-way matching, the purchase orders, packaging slips and vendor invoices are checked and reconciled for any kind of discrepancies.
Approval of Invoice and Making the Payment
After all the documentation process of three-way matching is completed, the invoice is cleared and sent for payment processing.
Keeping Records
After the payment is done, the records are sent for the process of bookkeeping and auditing. Subsequently, all documents pertaining to purchase requests and approved invoices are stored at a central location.
Characteristics of a Purchasing Manager
Some characteristics of purchase manager are as follows:
Interpersonal Skills
The purchase manager should have fluent and good communication skills. There are some of the aspects of interpersonal communication such as supplier handling, respecting the other opinions, etc.
Decision-Making Skills
The purchase manager face many problems in his role, in placing orders, selecting the reliable and best suppliers and maintaining healthy relationships with suppliers. Thus, the purchase manager should have good decision-making skills.
Bargaining Power
It must be the first motive of the manager that the organisation purchases materials at cost-effective prices. So, the purchase manager must have good bargaining skills. If he lacks this quality, suppliers may charge unnecessary high prices of the required goods.
Flexibility and Adaptability
As you know, the business environment is subject to frequent changes. Such changes can lead a lot of modifications in product design, which can further have an instantaneous rippling effect on every business area. A purchasing manager should be able to embrace these changes and adapt to these unexpected turns readily.
Integrity
A purchasing manager should be genuine while communicating with different parties and should keep his promises. In literal terms, ‘integrity’ means saying what one means and doing what one says. Integrity helps a purchasing manager to win trust of stakeholders and be well-respected both within and outside the company
Purchasing Activities
There are two major activities for purchasing that take place in an organisation. These are explained as follows:
Tactical Purchasing/Sourcing
Tactical purchasing is truly based on short-term transactional activities. Tactical purchasing is about performing routine administrative tasks like requesting quotes, placing orders, expediting, etc., on a reactive basis. It is outside of the context of an enterprise-wide focus and does not require achieving continuous improvement or contribution to specific top management goals. It generally ensures that the products and services have to be delivered at right time to right people.
Tactical responsibilities are as follows:
- Supplier identification
- Plan requirements
- Statement of work
- Review forecast and orders
- Stock checking
Strategic Sourcing
The process of sourcing comes before the purchase is made. It is the responsibility of the purchasing department, where the first task is to identify the suppliers and eventually procure goods and services from them. For this, it is necessary to have proper strategic sourcing in place for finding effective and trustworthy suppliers for supplying goods.
Let us better understand the concepts of tactical sourcing and strategic sourcing with the help of an example.
The purchasing department of a medium-scale manufacturing organisation has the flexibility to use any one of the suppliers in the supply base. In such a case, a purchasing manager will place the order with the supplier who offers lowest price and best delivery dates using his judgement skills. This scenario is followed in many purchasing organisations where purchasing managers do not have time.
Many a time,these purchasing organisations do not have the procurement technology (ERP) platform or the higher skill sets to perform deep analysis. The prime motive of these organisations is to keep the production lines running moving. In such operational environments, tactical sourcing is the best choice by ‘doing things right’. Now, compare this to a large-scale manufacturing organisation that has a full suite of ERP technology and dedicated purchasing staff.
It has reduced the vendor base by selecting a small number of `preferred suppliers’ after evaluating their core capabilities. Here, the purchasing staff has IT support to run enterprise-wide spend reports, perform spend analysis, and conduct market research on various goods. In this organisation, the staff negotiates lowest total cost of ownership (TCO) by considering factors such as quality, delivery, lead times and so on. Thus, it can be said that for such organisations strategic sourcing is the best choice by ‘doing the right thing’.
